How Good Is Able Engineering Holdings Limited (HKG:1627) At Creating Shareholder Value?
Today we are going to look at Able Engineering Holdings Limited (HKG:1627) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Able Engineering Holdings:
0.12 = HK$152m ÷ (HK$1.9b - HK$572m) (Based on the trailing twelve months to September 2019.)
Therefore, Able Engineering Holdings has an ROCE of 12%.
See our latest analysis for Able Engineering Holdings
Is Able Engineering Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Able Engineering Holdings's ROCE is fairly close to the Construction industry average of 12%. Regardless of where Able Engineering Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Able Engineering Holdings's current ROCE of 12% is lower than its ROCE in the past, which was 20%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Able Engineering Holdings's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Able Engineering Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Able Engineering Holdings's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Able Engineering Holdings has total assets of HK$1.9b and current liabilities of HK$572m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Able Engineering Holdings has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From Able Engineering Holdings's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Able Engineering Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Able Engineering Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
